Future Economists Will Probably Call This Decade the 'Longest Depression'

http://www.huffingtonpost.com/brad-delong/global-economic-depression_b_8924596.html

by lutesfuentes • 11 years ago

80 95 11 years ago

huffingtonpost.com

JimboOmega• 11 years ago

We already have a "Long Depression": https://en.wikipedia.org/wiki/Long_Depression

There are some interesting parallels to the current time - that was the era of the robber barons, for instance.

nerfhammer2• 11 years ago

Big difference was dependence on gold and/or silver for currency at the time.

rm_-rf_slash10• 11 years ago

In the course of selling his New Deal to the impoverished American public, president Franklin Delano Roosevelt pitched his reforms by stating: "It is common sense to take a method and try it. If it fails, admit it frankly and try another, but above all try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach."

The most frustrating part of this "longest depression" is that in our hyperconnected age, there more ideas than ever to at least try, from guaranteed income to subsidized apprenticeships, yet our elected representatives spend at least half of their time asking for money to run in their next election, and nothing at all gets done. For at least the United States, any substantial economic reform will require a corresponding reconstruction of how our representatives campaign and are elected and held responsible to the needs of their constituents, lest the economic engine be left to muster no more than a tired sputter.

davesque2• 11 years ago

Ironically, it could be this very abundance of ideas which is so paralyzing. The more choices you have, the harder it is to choose.

That being said, I agree that this problem has its roots in corrupt politics.

rm_-rf_slash10• 11 years ago

That's why reform has to start at a local level. Solutions that work brilliantly in Massachusetts have no guarantee of succeeding in Mississippi. Whatever ends up working broadly should be adopted by the federal government. Perhaps they could provide a block grant to each of the states to experiment with reforms and study the effects.

digi_owl2• 11 years ago

I think it is more that this time round, economics as a "school" is quite a bit more entrenched.

Keep in mind that during the great depression you had fascists in Italy and Germany, and communists in Russia.

Now the fascists have gone underground, and the communists have imploded.

All this gives the current mainstream economic thinking an air of correctness that it didn't have back then, by "virtue" of being the last system standing.

Sadly what is happening now is the rearranging of deckchairs on a sinking ship.

The big names of economics are arguing about where, if at all, the "frictions" are to be found in their models.

This while basically ignoring that the world right now is in the biggest private debt hole since the great depression, because they think that debt and savings are one and the same (and therefore sum to zero).

jerf5• 11 years ago

I think it's more in the increasing centralization of power. The central power is bigger and thus harder to move by sheer inertia, more risk-averse, and also more able to simply implement whatever it likes regardless of what anybody else thinks because it is isolate from the trenches.

I think one of the top-3 issues facing the US right now is we need a lot more power devolved back to the states... not out of a "state's rights" sense of the argument, but out of a sheer engineering argument that trying to run a large and diverse country from one city is not working in practice, and there's no theoretical reason why it should work. Diversity and central control are, if perhaps not necessarily "incompatible" in the strictest sense of the term, still at great odds with each other; the central authority is forever tempted to homogenize diversity to make central control easier.

theseatoms• 11 years ago

Shouldn't the federal government's legislative reforms move at a snail's pace? I agree that the ideas you've mentioned are worth exploring, but what makes you think that they'll try the good ideas?

Also, why not start at the state or local level?

rm_-rf_slash10• 11 years ago

State and local levels are the only places where there can be any real experimental reform. Just look at Colorado and the other states that have legalized marijuana by referendum. Direct democracy isn't necessarily better than elected representation, but politicians are motivated by the necessity of power, and so whoever controls the politicians controls the political process. People shouldn't be left up to decide everything, but they should have the power to question the decisions of their representatives and put an issue which garners enough support to a popular vote.

oldmanjay• 11 years ago

How many times has the federal government tried something that didn't work and frankly admitted the failure?

rm_-rf_slash10• 11 years ago

Times when the shame was not due to failure, but success, of their actions. Like the Japanese internment camps in WWII.

nerfhammer2• 11 years ago

Hoover started out doing austerity and raising taxes to balance budgets for the first couple of years, then turned around after that didn't work and started programs very similar to the new deal in his last year in office.

fiatmoney• 11 years ago

Ironically, FDR's economic policy amounted to "we'll try every kind of beating until morale improves". Completely incoherent market interventions aren't good for markets.

https://en.wikipedia.org/wiki/Recession_of_1937–38

stretchwithme• 11 years ago

People that want to buy and sell will do that, unless someone is interferring with price or threatening profits.

The Federal Reserve expanded credit to give us the Roaring 20s stock market. Eventually, there HAD to be a correction. Instead of letting things correct, government interferred and made it worse. And then kept repeating that.

And we've done the same thing with the housing bubble.

xlm1717• 11 years ago

In my opinion, the most frustrating part is that despite our hyperconnectedness, people still believe the propaganda that we're not in a depression or that our leaders got us out of the recession. Future economists will call the decade the "longest depression" not out of 20/20 hindsight, but simply because there will no longer be a need to make things seem rosy.

jsn117• 11 years ago

The terms "depression" and "recession" aren't just catch alls, they have actual definitions. And "we" (depending on the country, i'm assuming USA) are not in either.

rm_-rf_slash10• 11 years ago

If anything the story of communication has been one of ever greater methods to spread disinformation. Russians are swarmed on social media with paid shills for the government, and it makes it almost impossible to discern a genuine opinion or paid propaganda. I doubt there is a single person who is truly immune to misinformation, except perhaps the Beatles' "Fool on the Hill."

CaptSpify3• 11 years ago

people still believe the propaganda that we're not in a depression

Is there a source for this? Everyone I know believes that we still are in a depression, so it's probably just my social circles. I'd be interested to see the stats behind that.

skylan_q• 11 years ago

We already have a "long depression" in the history books:

https://en.wikipedia.org/wiki/Long_Depression

unemployment stayed low, very slight deflation persisted, and over the 30 years GDP per capita and GDP of the US grew considerably.

mywittyname3• 11 years ago

The propaganda is the statement that we are in a depression. We are NOT in a depression, nor a recession and have not been for several years. So, in fact, historians will not at all call this period a depression.

More likely, they will look back and wonder why so many people thought things were bad when, by all objective measurements, things were actually quite good. Low inflation, low commodities prices, decent wage growth, cheap housing, strong stock growth, a huge surplus of investment capital.

rm999• 11 years ago

It's not common sense to freely experiment with policy unless you're trying to sell a controversial progressive agenda (like, FDR in 1933). And I say this as a progressive who supports much of what he did. Applying sweeping changes is difficult and costly, and undoing them is even harder. For example, farm subsidies, which are generally unpopular, were put into place by FDR and just can't seem to go away.

Fundamental changes to our economic policy would probably last dozens or 100s of years, and could not easily be rolled back even if they hurt the economy.

Retric2• 11 years ago

FDR was dealing with a far worse situation than we are used to. People where starving and huge tent city's where showing up, that's a recipe for revolution. Don't forget the communist party was gaining significant momentum. So, waiting was no longer a realistic option.

Zach_the_Lizard2• 11 years ago

farm subsidies

The phrase 'Farm subsidies' doesn't quite do justice to what was put into place. The phrase sounds like just giving farmers money to grow stuff, which people might think is inefficient but probably not that big of a deal in the grand scheme of things. After all, these sorts of subsidies should increase supply and lower prices.

The reality is there's a tangled web of price controls, subsidies, import quotas, government purchases, etc. that in many cases have resulted in higher food prices, not lower food prices as simple subsidies might imply.

Take sugar, for instance. We have import quotas and tariffs on sugar resulting in higher sugar prices in the US than in the rest of the world despite having sugar growing regions in Mexico or the Caribbean on our doorstep. This is one of the reasons that we use high fructose corn syrup in everything instead of sugar. If we didn't have these laws, we'd have cheaper, more abundant sugar and probably less HFCS infused food.

clarkmoody• 11 years ago

FDR tried lots of thing that had the opposite of the intended effect.

Invoking the Trading with the Enemy Act of 1917, Roosevelt declared that "all banking transactions shall be suspended." Banks were permitted to reopen only after case-by-case inspection and approval by the government, a procedure that dragged on for months. This action heightened the public's sense of crisis and allowed him to ignore traditional restraints on the power of the central government.

In their understanding of the Depression, Roosevelt and his economic advisers had cause and effect reversed. They did not recognize that prices had fallen because of the Depression. They believed that the Depression prevailed because prices had fallen. The obvious remedy, then, was to raise prices, which they decided to do by creating artificial shortages. Hence arose a collection of crackpot policies designed to cure the Depression by cutting back on production. The scheme was so patently self-defeating that it's hard to believe anyone seriously believed it would work.

-- snip --

Yet after all this, the grand promise of an end to the suffering was never fulfilled. As the state sector drained the private sector, controlling it in alarming detail, the economy continued to wallow in depression. The combined impact of Herbert Hoover's and Roosevelt's interventions meant that the market was never allowed to correct itself. Far from having gotten us out of the Depression, FDR prolonged and deepened it, and brought unnecessary suffering to millions.

What will be the ultimate result of the interventions you propose? How are we examining the long-term effects of government intervention in the economy and cutting back the government where it is harmful to prosperity?

What about the acute depression of 1920[2]? Are we learning any lessons from that?

[1] https://mises.org/library/how-fdr-made-depression-worse

[2] https://mises.org/library/forgotten-depression-1920

rm_-rf_slash10• 11 years ago

This is the most detailed rebuke I have seen yet. Thank you for adding this to the conversation.

My weasley counterpoint is to say that FDR ultimately made more right moves than wrong, and he did not become, as he feared, "the last president".

Economic manipulation aside, his public works initiatives like the Tennessee valley authority gave people good work when there was none, and strengthened our national infrastructure for the economy to use as it grew. The common conclusion is that the only real cure for the Great Depression was World War II, but from a Mars-eye view, wasn't that essentially an enormous public works program?

Mikeb852• 11 years ago

Look at an economic chart pre and post New Deal. Not only did FDR's policies help the US recover from the depression, it set the framework for the strongest economic growth of the US' history (pre-1930s growth was much slower than it has been post 1945).

Furthermore, your source is as partisan as they come. 'Austrian' economics exists pretty much only on the internet. Mainstream economics has progressed since 1930.

anonbanker2• 11 years ago

Why does everyone overlook that Roosevelt invoked the "Trading with the Enemy Act of 1917" in order to declare taxpayers (the people) to be enemies of the state that they must conduct trade with?

Why does everyone overlook the ramifications of this action?

Retric2• 11 years ago

This reads like revisionist history. people had called the great depression of 1873 - 1896 the "Great Depression" yet here it was happening again just worse in 30 years. And in those 30 'good' years you had the first world war. Banks where and still are considered a major cause of economic downturns and even today we stress test banks on a regular basis.

Further, environmental devastation played a huge role in the Great Depression. https://en.wikipedia.org/wiki/Dust_Bowl

anonbanker2• 11 years ago

the country's been in perpetual bankruptcy since 1787. What did you expect to happen?

AnimalMuppet9• 11 years ago

The problem is that the situation is bad, but not so bad that it can't be made much worse. It's not enough to "try something" - you have to try something that at least will not hurt. If you don't know which way your thing will go, at an absolute minimum be willing and ready to bail on it very quickly if it works out badly.

jrochkind1• 11 years ago

Back before 2008, I used to teach my students that during a disturbance in the business cycle, we'd be 40 percent of the way back to normal in a year. The long-run trend of economic growth, I would say, was barely affected by short-run business cycle disturbances. There would always be short-run bubbles and panics and inflations and recessions. They would press production and employment away from its long-run trend -- perhaps by as much as 5 percent. But they would be transitory.

Wait, how do you know this isn't the long-term trend now?

AnimalMuppet9• 11 years ago

This has bugged me for a while, too. People look at the trend from 2000-2008, and think that it was the long-term trend. But we were blowing a bubble then; why does anyone think that that growth rate was sustainable?

kaonashi2• 11 years ago

A Solow-humper sees the error of his ways. It's the feel good hit of the new year.

Mikeb852• 11 years ago

Just curious, what do you think any of this has to do with Solow? Brad Delong was mistaken about certain shocks within the framework of the 'Keynesian' model - the Solow model is about how investment, capital and productivity (enabled by technology) sets long-run output.

kaonashi2• 11 years ago

Back before 2008, I used to teach my students that during a disturbance in the business cycle, we'd be 40 percent of the way back to normal in a year. The long-run trend of economic growth, I would say, was barely affected by short-run business cycle disturbances.

it was a stupid flip comment based on that, probably best it was downvoted

RobertoG• 11 years ago

"I was wrong. He was right."

That's an statement that you don't see frequently. Huge respect to professor DeLong.

ci5er• 11 years ago

I can take more evidence than has been accumulated over the last 5 years to turn him around, but once he changes his mind, he's usually pretty up-front about it and giving credit where it is due. You are right - it's a nice feature of his character.

paulpauper3• 11 years ago

Sounds like goalpost moving, where slightly mediocre growth becomes a 'depression'

The 2008 recession, while deep and sudden, was narrow, only lasting about 16 months until growth picked up, where it has remained. Hardly a decade.

Also, the authors seem to be cherry picking the bad data (weak wage growth, China, shrinking labor force) and ignoring the good data such as exports, consumer spending, robust S&P 500 profits & earnings, technological innovation, stock market gains, etc.

Right now, we’re in a Goldilocks economy of modest growth, no stagnation, tame inflation, and no meaningful economic headwinds. Some pundits like Summers and Krugman bemoan how America’s economic growth is too anemic, especially compared to the 40′s and 50′s, and that its best days are behind it, but as I show here and in the graph below, US GDP growth has broken from the pack, since 2008 exceeding pretty much all g-20 nations. Yeah, 2-3% GDP growth ain’t great, but compared to pretty much everywhere else that has either no growth (Japan, UK, France) or high-inflation growth (Turkey, India, Brazil) – it’s pretty good.

source: http://greyenlightenment.com/america-is-not-in-decline-long-...

And that is especially impressive for an economy as large as America. We’re never going to get back to 40′s era growth, and that’s fine. Law of large numbers and diminishing returns. It’s harder to grow an economy that is 5x larger at the rate it was growing when it was 5x smaller.

Post-2008 GDP growth is pretty much back to the historical average, or at least back to where it was in the late 90′s and 2000′s. Not hyper-speed growth, but certainty not recessionary.

Recent real GDP (below) doesn’t differ too much from historical performance:

http://i.imgur.com/znVtqaH.jpg

Real US GDP growth is roughly back to where it was between 1997-2007, and no one was complaining about stagnation back then.

jjtheblunt• 11 years ago

elephant in the room alert : huffingtonpost.com is a click farmer with questionable content.

iolothebard• 11 years ago

So point out where the article is wrong.

Argument fallacy alert: https://en.wikipedia.org/wiki/List_of_fallacies

ddingus• 11 years ago

It's the decade(s) where it took a really long time for us to figure out we just can't have our cake and eat it too.

If we want to continue with our economic preferences toward growth and capitalism, fine, but we also need to make sure the people at the bottom have enough to contribute meaningfully too, or we blunt the potential in all of that.

It really is like a field. Farmer grows some years of high yield, high drain on the soil crops. Good times, until they aren't.

Greed may see sucking it dry as a good thing, but the expectation of high profit at low investment just won't last. What happens when the bounty in a rich, fertile soil is gone?

Tepid returns, that's what. Increases in risks and costs too.

Edit: One could seek new, fresh ground, and repeat this. At some point, there is a lot of sour, drained ground with the winners all fighting over the ever shrinking fertile ground remaining, a clear case of diminishing returns at the macro level, despite many success stories suggesting otherwise.

On the other hand, either taking a little less, say by staggering crops or resting ground, or reinvesting some of what is gained to keep the ground healthy and fertile, act together and the bounty possible goes from an awesome peak to something less, still good, but sustainable longer term. Wealth can still be accumulated, but perhaps less liquid and larger amounts happen over longer periods of time.

In a very general sense, this all feels a lot like placing blame and shifting risks and costs around to avoid the more simple, direct and growing issue of how many of us just aren't able to participate in the economy in a growth meaningful way.

In this sense, disruption is like crack. Big gains are often had, and we like, want and need those, but it's all just buying more time, not actually getting at root causes. Because of that, many larger gains are offset by problem growth and tepid demand growth, neither of which do any of us longer term good.

And while each success appears to hint at an answer, we in a macro sense, just can't seem to string enough of them together to make sustainable gains.

GDP limps along, while we all chase bright spots... and for many, standard of living declines, despite some growth which should seemingly preserve at least parity.

mywittyname3• 11 years ago

First off, that prime age employment graph is a problem. The best way to lie with a graph is to fuck with the scale, so unless your intentionally misrepresenting data, your graphs should start at 0.

Secondly, his reasoning is, as he says,

"Back before 2008, I used to teach my students that during a disturbance in the business cycle, we'd be 40 percent of the way back to normal in a year."

Yet, this has never been the case after a major crash. Not in 2008, nor '99, '87, '78, etc. Compared to history, we are doing a bit better than previous recoveries.

Sounds like he's just pissed off that the US is the doing well despite not following his political beliefs regarding economic policy. It's like a preacher on the street corner talking about how we are all on the path to hell, despite all evidence to the contrary.

peter303• 11 years ago

Decade recession, maybe, depression no. Depression is when few who want to work have jobs and many dont have money for necessities. 80 years since the last one. People may not be getting ahead like they used to, but few are actually suffering.

roymurdock2• 11 years ago

This is a terrible article. It strikes me as too technical to do anything but anger the casual reader (see the article's comment section for examples) and too vague to say anything meaningful to the informed reader.

The only new information presented here is the professor's (extremely late) admission that his strict adherence to a misguided school of theoretical economics that no longer applied in the face of structural changes and non-economic factors ("politics and ideology" as he repeats throughout the article) was wrong. Great - how much did they pay you to put your brand name behind this article in order to lend The World Post, the Huffington Post's new highbrow project, credence?

As for what the author says we should do:

What we need now is 1) debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities. And if those prove inconsistent with full recovery, then we need massive government spending on infrastructure and other investments financed by money printing until full employment is reattained.

The second task will be one of political organization. For until politicians, finance ministry technocrats and central bankers feel under pressure to respond to and in fact internalize the diagnoses of Stiglitz, Eichengreen, Wolf and others, our problems will remain, as Stiglitz puts it, "not rooted in economics, but in politics and ideology."

And it is only after those ideological and political blockages have been removed that the tasks of economic policy -- and then of shifting policy to deal with the new problems that arise as consequences of fixing our current economic policies -- can be seriously begun.

1) debt relief to undwind the overhand

First of all, which debt is he referring to? Which overhang?

Bank mortgage debt caused by people taking out stupid loans on stupid housing projects, then walking away from that debt? That was already absolved and nationalized by in 2008.

Federal government debt? So we're going to ask everyone (including our own pension funds) who owns a treasury bond to forget that they have some claim that the US gov promised to repay? Or should we continue with QE and currency wars to try and devalue the dollar so that old debts become relatively less expensive, and long-term interest rates continue to fall?

Student loan debt that cannot be discharged through bankruptcy? This one is actually semi-reasonable, but would create a huge moral hazard for anyone looking to invest in education. We should probably stop creating that debt in the first place.

The debt that the captains of finance and industry owe to the average American for leading their companies and the country in an irresponsible and destructive fashion? Only one trader saw jail time post financial crisis - Kareem Serageldin, a senior trader at Credit Suisse who is serving 30 months. The rest have apparently absolved their debt through billions in fines paid out by the shareholders of the companies they managed. [1]

2) much tighter financial regulation

We established the Financial Stability Board, which adopted Basel III capital requirements, countercyclical capital buffers, surcharges for TBTF banks, stricter liquidity coverage ratios, minor decentralization of TBTF banks, enhancements to the terrible securitization model, etc. [2] What additional regulation is the author calling for, specifically?

Not to mention that financial regulation is causing the banks to be unable to lend out QE money! AKA restricting aggregate supply! So even if we were able to boost aggregate demand, it would be met with banks shrugging and saying - we need to keep more capital due to new regulation so we can't invest in your business or provide you with a loan, sorry.

3) massive government spending on infrastructure and other investments financed by money printing until full employment is reattained

Why would you return to Keynesian ideals when you've just admitted they were wrong?! We've already "printed" all the money we need through QE. We then gave it to the banks, who have subsequently parked it with the Federal Reserve, earning interest on it due to the LACK OF AGGREGATE DEMAND that the author describes in the first paragraph! It would make more sense for the Fed to enact a negative interest rate in order to spur the banks into loaning that money out!

As for spending on infrastructure - what budgets should we cut to get the funds? Social security and healthcare (~50% of budget [3])? Older voters would destroy any candidate who would even suggest such a thing, as they very well should. They contributed what the gov said was their fair share, they expect to be paid back in their old age.

Defense department (17%)? Good luck getting that past war lobbies and a public that's terrified of any mention of terrorism whether real or imagined. Other mandatory (12%)? It's mandatory. Interest (6%)? Can't change without renegging on bond contracts which would be terrifically destructive.

[1] http://www.theatlantic.com/magazine/archive/2015/09/how-wall...

[2] https://www.imf.org/external/pubs/ft/wp/2014/wp1446.pdf

[3] https://en.wikipedia.org/wiki/United_States_federal_budget#/...

mywittyname3• 11 years ago

Your response to this article is a million times more clear and informative than the article itself. Cunningham's Law in action.

someguydave• 11 years ago

Older voters would destroy any candidate who would even suggest such a thing, as they very well should. They contributed what the gov said was their fair share, they expect to be paid back in their old age.

So people have a moral ('fair' is a moral judgement word) right to unbounded medical services because some politician told them in the past that they could have things without paying for them? Would it be 'fair' for the youth of today to pay 50% of their earnings (plus all existing taxes) to the government to provide those services?

roymurdock2• 11 years ago

I'm 23. Do I think paying 50% of our budget on medicare and social security is sustainable? No. Personally, I believe it to be completely unsustainable given the lower birthrates, higher medical costs, higher levels of chronic disease and obesity, much higher life expectancies.

Can I empathize with someone who paid into these programs with years of hard work and is expecting the "fair" payout they were promised? Yes.

Am I making a value judgement of what is truly "fair"? No. That's completely subjective and can be argued in favor of either side.

AnimalMuppet9• 11 years ago

One nit:

As for spending on infrastructure - what budgets should we cut to get the funds?

He wasn't proposing cutting budgets to get the funds. He was proposing running increasing deficits to get the funds. While I consider that to be insane, given how far in debt the government is, and while it seems to contradict his first proposal, we still should state his position correctly before pointing out where it's wrong...

Future Economists Will Probably Call This Decade the 'Longest Depression'

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